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MOSL: SUN PHARMA (Buy)-Opportunity in Adversity-Multiple challenges in FY18-recovery in earnings expected from FY19

​SUN PHARMA: Opportunity in Adversity; Multiple challenges in FY18; recovery in earnings expected from FY19

(SUNP IN, Mkt Cap USD20.0b, CMP INR539, TP INR650, 21% Upside, Buy)

• Sun Pharma (SUNP) is trading at ~16x FY19E PER, which is ~20% and 30% below its 10- and 5-year average valuations, respectively. The stock has corrected more than 50% from its peak of >INR1,100 (in April 2015). This downward movement can be attributed to the regulatory overhang on Halol, competition in key products, consolidation in the distribution channel, and visibility of limited launches of niche products.
• We expect a recovery in earnings from FY19 (EPS growth of ~20% in FY19E), led by Halol resolution, launch of two specialty business products (although meaningful contribution from MK-3222 and Seciera may come only after 12-18 months of launch), and base business price erosion of <10% (v/s double-digit price erosion in FY17 and FY18E).

Channel consolidation in the US to add further pressure in FY18

• The industry has been adversely affected by channel consolidation over past 2-3 years. We expect further pressure in FY18 due to big-ticket-size consolidations like Walmart-Mckesson and Walgreens-Rite Aid.
• The big-three pharmacy benefit managers (PBMs) - Express Scripts, CVS Caremark and OptumRx (a division of large insurer UnitedHealth Group) - control ~75-80% of the market, which translates into 180m prescription drug customers. We expect double-digit price erosion in the base business over next 12-18 months. However, base business price erosion should come down to single-digit thereafter as we do not foresee any big consolidation in the distribution channel.